How this one tax punishes Arkansas small businesses
5 min read

How this one tax punishes Arkansas small businesses

21st Cent. Workforce
Dec 20
5 min read

Have you ever eaten out in Little Rock? Ever rented a meeting space in Conway? Ever bought a cup of coffee in Hot Springs? Odds are, you’ve had the distinct privilege of paying an “Advertising and Promotion” or A&P tax that are imposed by many local governments in Arkansas.

These taxes are locally-imposed taxes on “prepared” food and/or short-term rentals (including hotels and meeting spaces). All across the state, from Fayetteville to Little Rock to Hot Springs, more than one in three Arkansans live in a city with A&P taxes. 

While proponents of these taxes are quick to frame them as “pro-economic development” because the dollars are set aside for “advertising and promotion” of local cities and counties, in reality, A&P taxes are a punishment on Arkansans who choose to support local small businesses, particularly low-income folks. 

By extension, A&P taxes are a punishment on small businesses themselves. Sure, businesses pass the costs on to consumers, but these taxes arbitrarily raise their prices and hurt mom-and-pops all over our state.

The tax rates can range from 1 percent to 3 percent. In some cases, state law also allows the tax rate on short-term lodging to be raised as high as 4 percent. The city of Little Rock, for example, is currently taking advantage of this loophole. 

A&P funds have been riddled with waste and abuse for years. For example, the city of Conway spent $130,000 on a faulty Christmas tree. Not only did they waste the funds, they defended it in part by suggesting that they had so much excess A&P funding, they had nothing better to spend it on.

And of course A&P taxes do not replace other sales taxes. They are simply layered on top.

Consider a shopper Rogers, Arkansas. If someone decides to stay the night in this great community and support the local Arkansas economy, they will pay: 

  • 6.5 percent Arkansas state sales tax; plus
  • 2 percent state parks and tourism tax; plus
  • 3 percent City of Rogers lodging/A&P tax; plus 
  • 2 percent City of Rogers Sales tax; plus
  • 1 percent Benton County tax

That’s a total of 14.5 percent sales tax. On a $250 hotel bill, that’s an extra $36.25.

It’s not just tourists paying the price: it’s everyday Arkansans when they dine out with their families, plan a night away with loved ones, and support Arkansas small businesses.

The A&P food tax is also an administrative nightmare for local business owners. What counts as prepared food? A bag of raw chicken at the grocery store isn’t taxed; but a rotisserie chicken is. 

A cup of coffee is taxed, but a bag of coffee beans is not.

Whole fruit? Untaxed. Cut up and put into a cup? Taxed.

What about a bag of coffee beans that a customer grinds in the store themselves? Is that “prepared” food or not? 

You get the picture. It’s a nightmare, and not one Arkansas small business owners should be having to deal with. 

(Here’s an example of the nonsense Little Rock business owners have to try and comply with.)

Local governments are getting rich off these food and lodging taxes. In 2021, more than two-thirds of Arkansas cities with A&P taxes reported a revenue increase relative to pre-pandemic levels. In some towns, like Eureka Springs, revenues shot up by more than 23 percent.

When compared to depressed pandemic-level revenues, recent collections are even more astonishing, like the more than 50 percent spike seen in Fort Smith.

This is all at a time while Arkansans are dealing with record inflation and grocery costs that have soared by nearly 15 percent.

While it may be difficult for the legislature to completely unwind A&P taxes at this point, at minimum they should:

  1. Require localities to let voters weigh in on A&P taxes;
  2. Require that those votes be held at regularly-scheduled elections;
  3. Cap A&P tax reserves and/or require the tax rates to be lowered when reserves hit a certain threshold; and
  4. Eliminate the loophole that allows certain cities to raise the tax on lodging by an additional percent.

Arkansans–particularly our low-income neighbors–are struggling under record inflation while cities and counties are getting rich. It’s time to restore some commonsense.

Image of the story authorHayden Dublois
Visiting Economist

Hayden Dublois is the Visiting Economist at Opportunity Arkansas. His primary research areas are welfare, health care, workforce, unemployment, and tax policy.

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Image of the story authorNicholas Horton
Founder & CEO

Nic Horton is a native Arkansan and Founder & CEO of Opportunity Arkansas. He has spent more than a decade in the conservative movement as an expert on election, disability, tax, welfare, and workforce reform.

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